PRODUCTION COSTS OF ELECTRIC ENERGY FROM RENEWABLE ENERGY SOURCES

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1 PRODUCTION COSTS OF ELECTRIC ENERGY FROM RENEWABLE ENERGY SOURCES Suzana Kostic Electrical Engineering Institute Nikola Tesla, Koste Glavinica 8a, Belgrade Abstract: Today, most of the electric energy production is from non-renewable sources such as fossil fuels. As is well known, fossil fuels are non-renewable and have a negative consequence on the environment (global warming). Therefore, more and more renewable energy sources are used, such as solar, wind, tides, wave, hydro, small-power energy and geothermal heat. Renewable energy sources are central issues in the current European Union energy policy. In accordance to that, the European Parliament passed the Directive (2008) on climate changes and energy (the ), and therefore the EU is committed to reducing its emissions of greenhouse gases by 2020 to at least 20% below the 1990 levels, increasing the energy efficiency by 20% and increasing the share of renewable sources in the final energy to 20%. In 2009, the Serbian Government passed two significant Decrees which systematically regulate the status of producers of electricity using renewable energy sources the Decree on the measures of incentives for production of electricity using renewable energy sources and combined production of electricity and heat; and the Act on acquiring the status of privileged producers of electricity. Production costs for the different renewable energy sources are determined in this paper. They are calculated for different investment costs, different annual electric energy production, the given rate of interest and all that for the given life cycle of the plant. The costs established in this way are compared with purchase prices of renewable energy sources in Serbia and finally, on the basis of that, the economy of investing in renewable energy sources is analyzed. Key words: renewable energy sources, privileged producers, purchase prices, production costs 1. INTRODUCTION Renewable energy sources are energy sources that are found in nature and reproduced in whole or in part especially watercourses energy, wind energy, solar energy, biomass, geothermal energy, biofuels, biogas, synthetic gas, landfill gas, gas from sewage, water and waste water treatment plants from food and wood processing industries that do not contain hazardous substances [1]. The utilization of the available sources of renewable energy is very high on the list of priorities of the Energy Strategy. This is primarily in reference with Serbia s energy demand on the

2 local level, the reduction of energy imports and the improvement of the environmental aspects of energy production. Although the potentials of renewable energy sources are huge, the current technological development does not make it possible to rely only on them. Most of the energy obtained from renewable sources is water energy, whereas the share of other renewable sources of energy is currently comparatively small [2]. Actually, in parallel with the technological development, the renewable sources of energy are expected to economically compete with the conventional sources of energy. It may be said that the technologies for using wind energy, biomass and solar energy are already becoming more and more mutually competitive. The process of adopting new technologies is still slow, due to comparatively high initial prices. In line with the recognized environmental importance of renewable sources, greater construction of plants using such energy is being promoted. Accordingly, the Strategy of the European Union is to increase the share of renewable energy sources by 2020 to 20% from 12%, which was the average achieved in When Serbia is concerned, it is evident that there is a significant available energy potential in the form of renewable energy sources, which has been, apart from the hydro potential and fuel wood insufficiently used [2]. For the purpose of planning and adequate use thereof, it is necessary to establish which part of that potential is technically feasible and economically viable. It is also essential to provide the conditions which would prevent any administrative and technical barriers from slowing down the above process. The purpose of introducing incentives in Serbia (as well as globally), is to reduce the dependence on import, as well as to preserve environmental quality. 2. THE ECONOMY OF THE GLOBAL RENEWABLE SOURCES Owing to the impressive growth during the recent years, the renewable energy sources production activity is becoming a major industrial branch in expansion. In 2009 and 2010 alone, almost 200 billion US Dollars were invested in this field per year (Table 2). Consequently, the European Union had fulfilled all the planned predictions for the time horizon up to A testimony thereof is also the fact that the set target of 40 GW for wind energy was achieved five years earlier than planned. Estimates show that solar-power plants construction will experience a similar expansion in the following years, but, in spite of that, wind-power plants will continue to be the leader in renewable energy sources in Europe [3]. However, on the global level, solar-power plants are taking the lead over the wind-power plants Capital investments in renewable energy sources and greater employment of the population Capital investments in renewable sources reached 211 billion dollars in 2010 (Fig. 1), thereby exceeding the investments in most of the other economic sectors. It may also be said that almost all investments in the energy sector altogether are focusing more and more on renewable sources.

3 In 2009, in global terms, China became a country with the greatest investments in renewable energy sources (50 billion US Dollars, Fig. 2), primarily in wind-power plants. This trend continued in Germany follows (41 billion US Dollars) with the greatest investments in wind-power plants, and in 2010 it started with intensive investments in solar-power plants. The United States follow, with annual investments of 30 billion US Dollars, holding the high third place and they also invest mostly in wind-power plants. Brazil has recently been achieving a high rate of economic growth and, in line with that, has started to make major investments in biomass fuels. The importance and achieved scope of renewable energy activities, as an economic branch, is also illustrated by the data on the number of employees on the global level and in some countries where this industry is most developed, as shown in Table 1. Figure 1. Investments in renewable sources in the period [4] Figure 2. Investment flows into renewable energy sources on the global level [4] Table 1. Number of employees in the renewable energy sources activities in some countries, in 2010 [4] Type of power-plants World Brazil USA China Germany Spain Country Wind power-plants Solar power-plants Small hydro-power plants Biofuels Water solar heating The Rest Sum

4 Large investments are followed by increased employment: research and industrial employees in developed countries where there is already a serial production of the most expensive components of these power plants as well as elements for the assembly and assembling of such plants on selected sites, which makes around one third of the total investment funds. The latter may ensure a certain amount of employment in Serbia, and is therefore our chance for development. If a certain reduction of energy dependence is added to that, there is more reason for greater investments in renewable energy sources. Also, reduced import of expensive fossil fuels will indirectly result in strengthening the national currency Incentive measures for implementing renewable energy sources in the European Union Due to its increasing importance, this sector is becoming one of the most important branches for economic investments and employment, which calls for greater involvement of economists in analyzing the investment possibilities and the investment structure itself. In this respect, it is emphasized that there used to be a so-called three-thirds rule regarding investments in the energy sector: 1/3 from the state, 1/3 from loans and 1/3 from the power companies own funds. Other models should also be sought for nowadays, particularly before the production from renewable sources becomes competitive and dominant on the electricity market. Different forms of incentives have been used in the European Union in the recent years: net exchange, green labels, compensation of costs (Feed-in tariffs) and many 1 others [5]. Net-exchange 2 was established as a response to the need to simplify the electricity exchange procedure among households which had installed in their buildings systems for implementing renewable energy sources. This measure assumes that the produced energy, not consumed but delivered to the power transmission network, has the same economic value as the energy purchased from the power distribution. Furthermore, this means that households only pay the difference between the produced and consumed energy. This is particularly important for time spans of longer cloudiness (in the case of solar cells) or reduced windiness (in the case of wind generators). This is how the power distribution increases the stability of its supply during the summer or winter loads. The green labels represent the property rights of electricity producers from renewable energy sources to certain environmental benefits. The so-called green beams can be subject to trade between different electricity producers. For example, in Italy, all large electricity producers are bound by law to produce a certain amount of electricity from renewable energy sources. In this way, they obtain a certain amount of green labels 3 and acquire some rights on that basis. Economic compensation (Feed-in tariffs FIT) is the most widely used measure for encouraging the use of renewable sources of energy. It is currently in effect in twenty countries of the European Union. The essence of this incentive measure lies in the power distribution s liability to purchase all electricity on its territory obtained from renewable energy sources, assuming a payoff in precisely fixed amounts 4 within a fixed time frame. The amount of this compensation varies 1 Reduction of value added tax, tax loans etc. 2 Originated in California, and within the European Union this measure is applied by Italy for promoting the implementation of the PV system. 3 One green label is obtained by generation of 50 MWh of electricity from renewable energy sources. This measure is applied by Italy for promoting wind energy. 4 The compensation is paid off to each producer of electricity from renewable energy sources in a fixed amount for each delivered kilowatt-hour.

5 depending on the type of renewable energy source and the country 5 concerned. It should be emphasized that the implementation of this measure shall not encumber the taxpayers nor the government budget, but only the electricity consumers. This latest measure (FIT), defined as a prescribed liability to buyout energy from renewable sources at incentive prices, after a defined time span, calls for putting forward a request for correction. Namely, the correction shall inevitably be made, due to incurred changes in the business environment, by cutting down prices, mostly due to lower investment costs of equipment to be procured and installed at the power plants concerned Costs of electricity produced from renewable energy sources on the global level The renewable energy sources economy includes an analysis of achieved typical production costs (cusd/kwh), investment costs per unit of power (USD/kW), energy efficiency of sources (kwh/kw annually), the procedure and costs of capital acquisition, in order to determine the real production costs. Continuous and periodical production cost finding per unit is required, as particular components of the input costs are bound to change in time. In this respect, a particularly important item of the input costs are the investment costs per unit of power (USD/kW) which have a tendency of constant fall due to the technological development following the expansion of new generations of such sources. Figure 3. Trends showing a fall in the costs of electricity production from [4]: a) Solar (photovoltaic) sources power plants and b) wind-power plants Actually, in parallel with more intensive implementation of renewable energy sources, continuous progress has been made in the technology applied in the production of all components intended for power plants using renewable energy sources, which shall result in lower prices, after ensuring a more massive production (larger series and economy of scale ), and will furthermore be reflected in lower investment costs for the construction thereof. For that reason, some countries, primarily those which were among the first ones (a few years ago) to fix the above prices at a 5 Due to different technologies applied, the socio-political landscape, market and climate conditions.

6 comparatively high level 6, have put into force (and are still putting into force) a correction for the purpose of reducing the formerly fixed incentive prices for energy from renewable sources. As these prices are still higher than the prices of conventional energy sources (which provide more than 95% of the total electricity), they must be fixed (approved) on the basis of the cost criterion. As the investment costs per 1 kw of installed power are different, so are the incentive prices different for particular types of sources. The efficiency in terms of production (in kwh per kw of installed power) is also different, which is also an important factor for the average production costs (in USD/kWh) from different renewable energy sources. The relative costs should therefore be fixed in order to be stimulating for electricity production on sites with an average and above average potential and accordingly with average and above average efficiency (in kwh/kw of power). It is obvious that when fixing the incentive prices of electricity from renewable energy sources, detailed technological and economical estimates and analyses should be made both at the time of initial determination of such prices, and also after a certain lapse of time, when estimates show that there is ground for making such correction (reduction) 7. In addition to the above, there are some other factors which have an impact on incentive prices: the economic stability of a country, energy demand, as well as other factors under specific circumstances social, political, market, as well as the genuine features of a particular country or region. For the purpose of illustration, Table 2 includes typical costs of electricity production from different renewable energy sources, achieved in Table 2. Typical costs of electricity production from different renewable energy sources [4] Type of power plant Installed power Mean prices in cusd/kwh Small hydro-power plants 1 10 MW 5 12 Mini hydro-power plants MW 5 12 Micro hydro-power plants kw 7 30 Wind power plants onshore MW 5 9 Wind power plants offshore MW Small wind power plants kw Small house wind power plants kw Big solar thermal plants MW Big solar PH power plants MW Small solar PH power plants 2 5 kw Data in Table 2 show that there are still great differences in the costs of electricity production from different renewable energy sources. The respective difference also greatly depend on the sizeinstalled power of a power plant, as well as on the technology on which the generators are based, e.g. solar power plants generate energy from turbine generators, but more and more from PH power plants (generators). These prices essentially depend both on the coefficient of utilization of sources, as well as on the natural potential of each particular renewable energy source. The differences are actually considerably larger than in the case of power plants using un-renewable sources, so that the technical and economic estimates and analyses carried out in expert surveys and specific projects 6 Pursuant to the former current costs thereof. Germany is a typical example of such country. 7 Mostly due to lower investment costs for procurement and installation of these power plants, and in the case of photovoltaic sources, energy efficiency has also considerably increased.

7 are considerably larger and more complex and must be made carefully in all the project preparation phases. Table 3 includes data on average investment costs per unit of power and annual maintenance costs, for different types of facilities and power plants using renewable energy source. Table 3. Typical investment costs per unit of power (USD/kWe) and maintenance costs (USD/kWe) for different types of power plants using renewable energy sources [4] Type of power plant Installed power Investment cost of the power plant per unit in Operate & Maintenance cost per year Life cycle of the plant in year USD/kWe in USD/kWe Small hydro-power plants MW Mini hydro-power plants 1 10 MW Micro hydro-power plants MW Wind power plants MW onshore Wind power plants MW offshore Small wind power plants kw Small house wind power kw plants Big solar thermal plants MW Big solar PH power plants MW Small solar PH power plants 2 5 kw RENEWABLE ENERGY SOURCES IN SERBIA 3.1. Incentive measures for the production of electricity using renewable energy sources purchase prices Decree on measures of incentives for the production of electricity using renewable energy sources and combined production of electricity and heat prescribes in more detail measures of incentives for the production of electricity using renewable energy sources and for purchase of energy Feed-in tariff, balancing and readout; defines energy facilities that produce electricity from renewable sources, regulates the content of agreement on purchase of electricity per incentive measures, as well as reimbursement of costs to the purchaser of produced energy [7]. Incentive measures, in terms of this Decree, include the purchase price determined by this Decree, according to the type of power plant that produces electricity using renewable energy sources as well as according to the installed power (P) expressed in MW [7]. Price is determined in eurocent per kilowatt hour (c /kwh) and provides different amounts, depending on the installed power of facility and other parameters. See Table 4. Type of power plant, as well as installed power is determined by the act on acquiring the status of privileged producers of electricity. That Decree [1] defines privileged status for producers

8 of alternative energy resources which have priority for subsidies, tax, customs and other incentives according to the law and according to other customs and tax regulations. Table 4. Purchase price (given in Decree) determined in eurocent per kilowatt hour [7] No. Type of power plant Installed power (MW) Incentive measure purchase price (c /1kWh) 1. Hydro-power plants 1.1. Micro hydro-power plants < 0.5 MW Mini hydro-power plants 0.5 MW 2 MW *R 1.3. Small hydro-power plants 2 MW 10 MW On the existing infrastructure < 2 MW On the existing infrastructure 2 MW 10 MW Biomass power plants 2.1. Micro biomass power plants <0.5 MW Mini biomass power plants 0.5 MW 5 MW *R 2.3. Small biomass power plants 5 MW 10 MW Wind power plants Solar power plants 23 *R Interval price according to installed power expressed in MW The right to incentive measures set forth in this Decree for electricity produced in power plants that use wind energy is limited to the total installed power up to 450 MW in these power plants [7].The right to incentive measures set forth in this Decree for electricity produced in power plants that use un-accumulated solar energy is limited to the total installed power up to 5 MW in these power plants [7]. The current purchase prices of renewable energy sources (determined by Decree) in Serbia are from /kwh (for small hydro-power energy) to 0.23 /kwh (for solar energy). These prices are times bigger than the electric energy prices of many fossil-fueled power plants. The purchase prices of renewable energy sources are high, mainly, due to still too high investment costs. Because of that, renewable energy sources are not yet economically competitive Mean production costs of electricity for particular renewable energy sources A widespread economic parameter to compare the various sources for electricity generation is the mean production cost (MPC). Since MPC depends on many factors, it must be handled with care: depending on the values used for its calculation, the MPC can change in a quite wide range [8]. For example, the costs of a given plant (or technology) should concern the whole life cycle of the plant, including also its final decommissioning, but often this final stage is not properly estimated. Mean production cost (MPC) defines like as: MPC C A C ( i o& m E ) C f (1)

9 Where the actualization coefficient (A) is defined: r (2) A 1 n 1 (1 r) Production costs (c /kwh) for the different renewable energy sources (solar-power plants, wind-power plants, small hydro-power plants and biomass-power plants) are determined in this paper. They are calculated for different investment costs C i ( /kw), different current Operating & Maintenance cost Co&m ( /kw), different annual electric energy production E (kwh/kw), the given rate of interest (r = 5%) and all that for the given life cycle of the plant (n = 20 years). At biomass power plants only, the fuel costs C f (c /kwh) have also been taken into consideration. Such established production costs are compared with the purchase prices of renewable energy sources in Serbia (given in Decree) and finally, on the basis of that, the investment economy in renewable energy sources is analyzed. See Table 5. On the basis of the calculated values in table 5, it is shown that there are large differences in the production costs per unit between the analyzed sources of renewable energy. The electrical energy obtained from solar power plants has the largest production costs per unit, while electrical energy obtained from small hydro-power plants has the least production costs per unit. This clearly shows why the purchase prices for different renewable energy sources given in the Decree have been determined on different levels. Taking that into consideration, it is interesting to do a comparative analysis of the calculated production costs per unit (Table 5) and the given purchase prices of corresponding renewable energy sources in the Decree (Table 4). Table 5. Mean production costs of electricity for particular renewable energy sources expressed in eurocent per kilowatt hour Solar power plants Wind power plants Small hydropower plants Biomass power plants Investment cost of the power plant per unit in /kw (Ci) Annual electrical energy produced in kwh/kw (E) [9] Current Operate & Maintenance cost /kw (Co&m)* Fuel cost in c /kwh (C f ) Actualization coefficient (A) Mean production cost in c /kwh (MPC) *Co&m = 2% C i at solar power plants, wind power plants and small hydro-power plants; *Co&m = 3% C i at biomass power plants.

10 Calculated production cost per unit (depending on supposed annual production, investment cost of the power plant per unit and current Operating & Maintenance costs) for electrical energy produced from [10]: (1) Solar power plants are in the interval from 14.4 to 33.3 c /kwh, while their purchase price amounts to 23 c /kwh; (2) Wind power plants are in the interval from 5.2 to 12.0 c /kwh, while their purchase price amounts to 9.5 c /kwh; (3) Small hydro-power plants are in the interval from 5.0 to 10.0 c /kwh, while their purchase price is from 7.85 to 9.7 c /kwh; (4) Biomass power plants are in the interval from 7.6 to 13.2 c /kwh, while their purchase price is from 11.4 to 13.6 c /kwh. Figure 4. Mean production cost of electrical energy from renewable energy sources 5. CONCLUSION An approximate amount of 211 billion US Dollars was invested in the RES industry in Also, on the global level, around 3.5 million people were employed in this field of activity. All forms of energy are expensive, but as time goes by, RES are becoming generally cheaper, whereas fossil fuels are becoming more and more expensive. Actually, in order to make the renewable energy sources more competitive, states have been introducing incentive measures. The most widely used incentive measure is the feed-in tariffs (FIT). When Serbia is concerned, the fact is that it is significantly below the global average, in terms of the installed capacities. On the other hand, Serbia evidently has a significant available potential of renewable energy sources, which is even above the global average. For the purpose of greater use of the mentioned potential, the Government of Serbia passed a Decree on incentive measures in the form of feed-in tariffs, at the end of 2009.

11 The Analysis results given in this paper show that the approved prices (FIT) for electricity generation from renewable energy sources are sufficiently profitable on sites with average and above average energy potential. The results of the Analysis show that the average value of calculated production costs of electricity per unit from renewable energy sources already corresponds to the purchase prices given in the Decree. This confirms that purchase prices are determined on the real level which gives a stimulus for an even more rapid growth and development of this part of the energy sector in Serbia. REFERENCES [1] Decree about conditions for acquisition the status of privileged producers of electricity and criterions for realization mark of those conditions, Official Gazette of RS, No. 72/2009 from Sep 3, [2] Mesarevic PhD Miodrag, Real potential of renewable energy sources in Serbia, ENERGIJA ekonomija ekologija, No. 1-2, pp , [3] Bela knjiga Elektroprivrede Srbije, JP Elektroprivrede Srbije, [4] Global Trends in Sustainable Energy Investment 2010, Analysis of Trend and Issues in the Financing of Renewable Energy and Energy Efficiency, UNEP SEFI Bloomberg, [5] Đukanović S., Podsticanje primene obnovljivih izvora energije Španija, Italija, Srbija, Škola biznisa, Broj 4, str , [6] Jovanović B., Pavlović M., Stanje i razvoj malih hidroelektrana u Srbiji, Jefferson Insitute, str. 11, [7] Decree about measures of incentives for the production of electricity using renewable energy sources and combined production of electricity and heat, Official Gazette of RS, No. 99/2009 from Dec 1, [8] S. Quinoa, Present and future limits for the PV generation growth, Electrotechnical Review 77 (2-3): , 2010, Ljubljana, Slovenia. [9] A. Vucković, N. Despotovic, Impact of renewable energy sources on price of electricity, 30th conference of CIGRE, Zlatibor, Serbia, R C5 16, [10] Kostić S., Analysis prices and production costs for electric energy from renewable energy sources in Serbia, ENERGIJA ekonomija ekologija, No 3-4, pp , 2012.